Equity Linked Savings Schemes (ELSS) continue to be one of the most popular investment options under Section 80C of the Income Tax Act, allowing deductions of up to ₹1.5 lakh annually. But while most investors are aware of the tax savings on investment, they often overlook the tax implications at the time of redemption, especially after the 3-year lock-in period.
As per Union Budget 2024, there are important changes to the LTCG (Long Term Capital Gains) tax rules that affect ELSS redemptions. Understanding these will help you plan your exits more efficiently and reduce your tax liability.
What Happens After 3 Years?
ELSS investments come with a mandatory lock-in of 3 years, the shortest among all tax-saving instruments under Section 80C. After this period, investors are free to redeem their units. However, any capital gains realized at redemption are subject to LTCG tax.
Earlier, the first ₹1 lakh of LTCG in a financial year was tax-free, and gains beyond that were taxed at 10%. But with the Budget 2024 changes, this threshold and rate have been updated.
🔄 Updated LTCG Tax Rules (Post Budget 2024)
From FY 2024–25 onward:
- LTCG exemption limit on equity mutual funds is now ₹1.25 lakh per financial year
- Tax rate beyond this exemption is 12.5% (without indexation)
- Applies to ELSS, equity mutual funds, and listed equity shares held for more than 1 year
🧮 Example: How to Calculate LTCG Tax on ELSS Redemption
Suppose you invested ₹1,00,000 in HSBC ELSS Tax Saver Fund – Direct Growth on 1st August 2020, at a NAV of ₹50. You received 2,000 units.
You redeem all units on 2nd August 2023, when the NAV is ₹90.
- Redemption Value = 2,000 × ₹90 = ₹1,80,000
- Capital Gain = ₹1,80,000 – ₹1,00,000 = ₹80,000
✅ Since the gain is less than ₹1.25 lakh, no LTCG tax is payable.
Now assume your gain was ₹2 lakh in another case:
- Exempted Gain = ₹1.25 lakh
- Taxable Gain = ₹75,000
- Tax Payable = 12.5% of ₹75,000 = ₹9,375
SIP in ELSS? Use FIFO and Track Lock-Ins
If you’re investing via Systematic Investment Plans (SIPs) in ELSS, remember:
- Each SIP has a separate 3-year lock-in
- Redemptions follow the FIFO (First-In-First-Out) rule
- You’ll need to track which units are eligible for withdrawal and compute gains separately
Reinvesting? It Starts a New Lock-In
If you redeem ELSS units and reinvest them (e.g., to claim another Section 80C benefit), the new investment comes with a fresh 3-year lock-in. However, any gains from the previous ELSS investment will be taxed as per the new rules at the time of redemption.
Tips to Optimize ELSS Taxation
- Don’t redeem ELSS just because the 3-year lock-in is over.
- Hold for longer periods to maximize compounding benefits.
- Use the ₹1.25 lakh exemption window wisely each year for tax-efficient exits.
- Spread redemptions across financial years if gains are high.
- Prefer Direct Plans over Regular Plans for lower expense ratios and better returns.
Final Thoughts
The updated LTCG rules from Budget 2024 make ELSS redemptions slightly more taxable than before. However, the ₹1.25 lakh exemption still gives investors a decent cushion for tax-free gains. ELSS remains a powerful instrument for tax-saving + long-term wealth creation, and with the right strategy, you can make the most of its benefits even after the lock-in period ends.
📚 Further Reading:
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